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Corporate interest restriction ‘devil is in the detail’

Highlights

Also on KPMG.com

This is the fifth of our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules, which have been removed from Finance Bill 2017 following the announcement of the general election. Based upon the HMRC messaging that “There has been no policy change and the Government has announced it will legislate for the provisions at the earliest opportunity in the next Parliament” we would recommend that groups assume that the rules will apply from 1 April 2017 until an announcement is made by Ministers. This week, we look at the public benefit infrastructure exemption (PBIE) as well as the potential application of grandfathering to related party debt for infrastructure projects which qualify for the PBIE. The purpose of the PBIE is to enable companies operating qualifying infrastructure (i.e. regulated businesses) and real estate businesses in the UK to achieve certainty regarding the deductibility of senior debt on long term projects, which may impact on the funding decisions and ultimate viability of these projects.

Where the PBIE applies, interest on non-related party debt is exempted from the CIR rules subject to a requirement that the recourse of the creditor is limited to income, assets or shares in or loans issued by the qualifying PBIE company. Therefore, interest on non-related party debt is not restricted under the fixed ratio rule (FRR).

Related party debt is not exempted under the PBIE, subject to inclusion of debt where the creditor is also a qualifying infrastructure company, but may be grandfathered where it is in place on or before 13 May 2016 as discussed below.

Meaning of a ‘qualifying infrastructure company’

Qualifying UK infrastructure companies benefit from the PBIE. To qualify, the company’s income and assets must be referable to activities related to ‘public infrastructure assets’, and be fully taxable in the UK.

The income/asset requirement is that all but an insignificant proportion of a company’s income or value of its assets (being tangible assets, service concession arrangements, financial assets etc) is derived from qualifying infrastructure activity. This includes shares in, or loans with, a qualifying infrastructure company. Therefore, a holding company of a qualifying infrastructure company should be able to elect into the PBIE. These requirements include provisions that allow for a company to qualify where it has no income/assets, which should enable large projects to qualify during the construction phase.

The draft legislation provides prescriptive lists (albeit examples and subject to further regulations) for the terms ‘infrastructure’, ‘infrastructure authority’ and ‘relevant public body’.

Investments in joint ventures/transparent entities

New clauses have been included setting out how the rules for qualifying infrastructure companies apply in the case of a joint venture company which has a mix of investors all of whom have lent to the company, some of whom meet the definition of a qualifying infrastructure company themselves and some which do not. The rules now also provide for companies who hold significant interests in transparent entities (e.g. partnerships) that carry on qualifying infrastructure activities to take this into account for the purposes of the asset test in certain circumstances.

Time limit for making the PBIE election/ transitional provisions

A PBIE election must be made before the beginning of the period in which it is to apply (subject to transitional provisions described below) and lasts for five years. It can be revoked at the end of the five year period but if this happens, it is not possible to elect back into the PBIE for five years.

The deadline by which to make the PBIE election has been extended to 1 April 2018 in respect of accounting periods beginning before this date.

Grandfathering of related party debt

The rules provide for grandfathering of related party debt entered into on or before 12 May 2016 for qualifying infrastructure companies where at least 80 percent of the company’s future ‘qualifying infrastructure receipts’ for a future period (being 10 years unless the loan ceases before 12 May 2026) are highly predictable by reference to ‘qualifying public contracts’.

Qualifying infrastructure receipts refers to receipts arising from qualifying infrastructure activities carried on by a company or attributable to them through a direct or indirect interest in the company through shares or loans. The predictable revenues include revenues that are not contracted but where volume of receipts are capable of being predicted. A qualifying public contract is a contract (lasting at least 10 years) entered into on or before 12 May 2016 with a relevant public body or following bids made in an auction conducted by a relevant public body. It is expected that projects such PPPs, ‘OFTOs’ (offshore transmission links) and CfDs (Contract for Differences projects in the energy sector) should meet this definition given they are publicly tendered, whereas other projects with public subsidies (such as ROCs and FiTs) may not.